Vault Guide to Finance Interviews Valuation Techniques
How Much is it Worth?
Imagine yourself as the CEO of a publicly traded company that makes widgets. You’ve had a highly successful business so far and want to sell the company to anyone interested in buying it. How do you know how much to sell it for? Likewise, consider the Bank of America acquisition of Fleet. How did B of A decide how much it should pay to buy Fleet? For starters, you should understand that the value of a company is equal to the value of its assets, and that Value of Assets = Debt + Equity or Assets = D + E If I buy a company, I buy its stock (equity) and assume its debt (bonds and loans). Buying a company’s equity means that I actually
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Basic overview of financial statements There are four basic financial statements that provide the information you need to evaluate a company: • Balance Sheets • Income Statements • Statements of Cash Flows • Statements of Retained Earnings These four statements are provided in the annual reports (also referred to as “10Ks”) published by public companies. In addition, a company’s annual report is almost always accompanied by notes to the financial statements. These notes provide additional information about each line item of numbers provided in the four basic financial statements. The Balance Sheet The Balance Sheet presents the financial position of a company at a given point in time. It is comprised of three parts: Assets, Liabilities, and Shareholder’s Equity. Assets are the economic resources of a company. They are the resources that the company uses to operate its business and include Cash, Inventory, and Equipment. (Both financial statements and accounts in financial statements are capitalized.) A company normally obtains the resources it uses to operate its business by incurring debt, obtaining new investors, or through operating earnings. The Liabilities section of the Balance Sheet presents the debts of the company. Liabilities are the claims that creditors have on the company’s resources. The Equity section of the Balance Sheet presents the net worth of a company, which equals the assets